News

Economic Outlook: David Smith: Polls apart, Germany is on top

LAST SUNDAY it was Japan’s turn to re-elect a reform-minded prime minister. Which way will the Germans jump when they vote today, and will their choice of chancellor — Angela Merkel or Gerhard Schröder — matter for the economy? Germany remains the world’s third-largest economy until 2007 when it will be overhauled by China. The federal republic is Britain’s biggest trading partner; exports and imports together totalled £30.5 billion in the first half of this year compared with £25.4 billion for trade with America.

Germany has in recent years been the mirror image of Britain. The UK economy has been propelled along by consumers, creating a virtuous circle in which their spending creates jobs in the economy, which in turn generates more spending. Keynes’s multiplier has been alive and well, at least until it stalled a few months ago.

Germany, meanwhile, has been caught up in something like Keynes’s liquidity trap, in